Stabilized, but still fragile: Our CIO Monthly Special on the banking crisis

Our monthly CIO update analyzes the current market environment and presents the backstories. Presenters are Frank Häusler, Chief Investment Strategist, and Andreas Venditti, Swiss Equities Analyst.

CIO Monthly Special—Inflation, recession, and the banking crisis

In March, a banking crisis erupted very suddenly and unexpectedly. In both the USA and Switzerland, a well-established institution made the headlines. How did this happen?

First of all, one has to consider the two cases separately, and take a macroeconomic perspective. Because the US Federal Reserve sharply tightened interest rates over the past few months, Treasury bills (short-term government bonds) had become attractive investments again. Many savers reacted by shifting their money out of bank accounts and into these instruments—and this proved fatal for Silicon Valley Bank (SVB). The outflow of client funds forced SVB to sell assets in order to create liquidity. Because the bank itself was heavily invested in long-term government bonds—and these had lost a lot of value as a result of rising interest rates—it had to realize losses. The story comes down to a case of inadequate risk management. In the end, the broadening of the US government's deposit insurance guarantee to all depositors, together with the subsequent takeover of SVB by First Citzens Bank, managed to calm the situation down again relatively quickly.

The Credit Suisse situation is quite different. First, a series of problems, scandals, and financial losses led to a massive loss of confidence in the bank. This was followed by an equally drastic withdrawal of client funds—within a two-week period last fall, almost 100 billion Swiss francs flowed out of CS, and the bank was no longer able to recover from this. It had to be taken over by its competitor UBS. In Switzerland, too, this rescue measure temporarily calmed the markets.

What's next? The situation remains fragile, and it will not be able to bear any further external shocks. One consequence will likely be new banking regulations. It will be interesting to see whether these will take new factors into account, such as social media and mobile banking. At SVB, around 20 percent of the bank’s deposits were apparently withdrawn within a matter of hours. How can such a "digital bank run" be prevented or mitigated in the future?

The current environment also has an influence on our portfolio. While a recession is already causing investors some worries, possible rate cuts would give the stock market a boost. Given the uncertainties, we are taking a cautious stand, with weightings remaining neutral on all major asset classes such as equities, bonds, cash, and commodities. In particular, we favor quality equities—i.e. shares in companies with strong balance sheets— and government bonds that will benefit from interest rate cuts.